Interest in International Investment Arbitration

In international investment arbitration interest may represent a significant portion of a final award and it is not uncommon for interest to exceed actual damages.[1] While not being an independent remedy, interest represents an important element of compensation.[2]

The main purpose of an award of interest is “to compensate the damage resulting from the fact that, during the period of non-payment by the debtor, the creditor is deprived of the use and disposition of that sum he was supposed to receive”.[3]

BIT’s usually include an explicit reference to interest in their provisions on the amount of compensation in case of expropriation and in their provisions on dispute settlement. However, it is possible to claim it even in the absence of a treaty provision to this effect. As indicated in the Vivendi II case, “Absent treaty terms or provisions in the governing law to the contrary, it is generally accepted that international tribunals may award interest to an injured claimant; indeed the liability to pay interest is now an accepted legal principle.”[4]

This conclusion is in line with Article 38 of the ILC Articles on State Responsibility, which reads:[5]

Interest on any principal sum due under this chapter shall be payable when necessary in order to ensure full reparation. The interest rate and mode of calculation shall be set so as to achieve that result.

Interest runs from the date when the principal sum should have been paid until the date the obligation to pay is fulfilled.

When fixing interest, international tribunals need to decide on the rate (1), whether simple or compound interest will be awarded (2), and the period during which interest will accrue (3).[6] They dispose of a large margin of discretion in this respect.[7]

There is no uniform practice on awarding interest in international investment law.[8] Thus, the tribunals may use a number of methods in order to determine the applicable interest rate:

a borrowing rate approach, which relies on the interest the investor had to pay on borrowed funds.

a host State rate approach, which uses the statutory rate in the host State as a ‘helpful benchmark’, since it is the legal minimum recognized by the State itself.

a ‘coerced loan’ approach – under this method, the investor is turned into an ‘unwilling lender’ to the State, and therefore is entitled to interest equal to ‘the State’s short-term borrowing rate’.

an ‘investment alternatives’ approach, which reflects the additional sum that the investor’s money would have earned, had it been reinvested each year at generally prevailing rates of interest. When applying this approach, tribunals often award interest at a rate equal to the short-term United States Treasury Bills or US six-month certificates of deposit or at the LIBOR rate.

As to the question of compounding interest, compounded interest was awarded in most recent investment awards. As the tribunal in Continental Casualty v. Argentina explained: “The time value of money in free market economies is measured in compound interest; simple interest cannot be relied upon to produce full reparation for a claimant’s loss occasioned by delay in payment.”[9] Moreover, in Gemplus v. Mexico, the tribunal concluded that “there is now a form of ‘jurisprudence constante’ where the presumption has shifted from the position a decade or so ago with the result it would now be more appropriate to order compound interest, unless shown to be inappropriate in favour of simple interest”.[10] The tribunal will also need to decide on the frequency of compounding (e.g., quarterly, semi-annually or annually).

As to the relevant period, the tribunal in SGS v. Paraguay explained: “[t]he virtually universal principle of international law and international arbitration practice in the case of a delayed payment of monetary obligations due is to apply interest as of the date payment became due.”[11] The real period will vary depending on the circumstances of each individual case.

Finally, tribunals also usually award post-award interest (also referred to as moratory or default interest), which is meant to create an effective incentive to comply with the award without delay. It starts accruing after its issuance or after expiration of a grace period granted by the tribunal.